Press Release

DBRS Assigns AA (low) Ratings to Unione di Banche Italiane S.p.A. Covered Bonds (OBG – Mortgages – Programme 1) Series 27 Guaranteed by UBI Finance S.r.l.

Covered Bonds
February 26, 2018

DBRS Ratings Limited (DBRS) assigned an AA (low) rating to Series 27 of the Obbligazioni Bancarie Garantite (OBG; the Italian legislative covered bonds) issued under the Unione di Banche Italiane S.p.A. Covered Bonds Programme 1 (UBI OBG1 or the Programme), which is guaranteed by UBI Finance S.r.l.

As of today, including the newly issued series, there are 15 series of OBG, for a total nominal amount of EUR 11.6 billion outstanding under the Programme.

The ratings are based on the following analytical considerations:

-- A Covered Bonds Attachment Point (CBAP) of A (low), being the Long-Term Critical Obligations Rating of Unione di Banche Italiane S.p.A. (UBI). UBI is the Issuer and Reference Entity for the Programme. DBRS does not classify Italy as a jurisdiction in which covered bonds are a particularly important funding instrument; however, DBRS deems the cover assets to be strategic for the core activity of the Issuer.
-- A Legal and Structuring Framework (LSF) Assessment of “Adequate” associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of BBB (low), being the lowest in line with the assigned LSF-Implied Likelihood (LSF-L).
-- An LSF-Implied Likelihood (LSF-L) of “A”.
-- A two-notch uplift for high recovery prospects.
--A committed maximum asset percentage of 93%, the 23.5% minimum level of overcollateralisation (OC) observed in the last 12 months and the level of 17% that DBRS considers to be sustainable based on discussions with the Issuer and expected market developments.

The transaction was analysed with the DBRS European Covered Bond Cash Flow tool. The main assumptions focused on the timing of defaults and recoveries of the assets, interest rate stresses and market value spreads to calculate liquidation values on the cover pool (CP).

Everything else being equal, a one-notch downgrade of the CBAP would lead to a one-notch downgrade of the LSF-L, resulting in a one-notch downgrade of the covered bonds rating.

In addition, all else unchanged, the OBG ratings would be downgraded if any of the following occurred: (1) the CPCA were downgraded below BBB (low); (2) the LSF assessment associated with the Programme was downgraded to “Modest”; (3) the quality of the CP and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects; (4) the relative amortisation profile of the OBG and CP moved adversely; or (5) volatility in the financial markets caused the currently estimated market value spreads to increase.

The Bank of New York Mellon, London Branch acts as the English Account Bank: its ratings comply with the threshold for the Account Bank, given the ratings assigned to the OBG, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” and “Rating European Covered Bonds” methodologies.

The total outstanding amount of OBG, including the newly issued series, is EUR 11.6 billion. The aggregate balance of the CP, as at 31 December 2017, was EUR 14.1 billion of residential mortgages plus EUR 317 million of cash collections, resulting in a total OC of 23.5%.

As at December 2017, the CP comprised 184,184 first-ranking residential mortgages. The mortgages have been originated by network banks of the UBI group.

The weighted-average current loan-to-value ratio of the mortgages was 52.1% with a seasoning of 7.2 years. The CP was mainly distributed in Lombardy (47.4%), Lazio (10.6%) and Piedmont (8.5%).

The CP comprised fixed-for-life loans (19% by outstanding balance) and floating-rate loans (81% by outstanding balance), the latter of which includes mixed loans as well as optional loans currently featuring a fixed-rate coupon. The floating-rate mortgage loans are indexed to different plain-vanilla bases and reset at different dates.

In comparison, 88% of the liabilities pay a fixed rate and 12% pay a floating rate linked to three- and six-month Euribor plus a spread. The resulting interest and basis risks are unhedged. This has been considered in DBRS’s cash flow analysis.

All CP assets and OBG are denominated in euros. As such, investors are not currently exposed to any foreign exchange risk.

The weighted-average life (WAL) of the CP is 9.3 years, whereas the WAL of the OBG is 5.6 years. The resulting asset-liability maturity mismatch is mitigated by the 12-month maturity extension in case of an Issuer event of default and by the OC.

DBRS has assessed the LSF related to the UBI OBG1 as “Adequate”, according to its rating methodology. For more information, please refer to the DBRS commentary “Italian Obbligazioni Bancarie Garantite Legal and Structuring Framework” found at www.dbrs.com.

For further information on the Programme, please refer to the rating report that is available on www.dbrs.com.

Notes:
On 14 September 2022, DBRS Morningstar updated the notes section of this press release to reflect the correct initial rating date of 24 August 2015.

All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is “Rating European Covered Bonds”.

In DBRS’s opinion, the change under consideration does not require the application of the entire principal methodology. Therefore, DBRS focused on the cash flow analysis.

A review of the transaction legal documents was limited to the final terms of Series 27.

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf.

The sources of data and information used for these ratings include historical performance data, loan-by-loan level and stratification information on the CP provided by the Issuer.

DBRS did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial rating, DBRS was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.

DBRS does not audit or independently verify the data or information it receives in connection with the rating process.

The last rating action on this transaction took place on 23 February 2018, when DBRS assigned a rating of AA (low) to Series 26, and confirmed the ratings of the other CB Series outstanding under the Programme at AA (low).

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and U.S. regulations only.

Lead Analyst: Antonio Laudani, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 24 August 2015

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor
London
EC3M 3BY
United Kingdom
Registered in England and Wales: No. 7139960

The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.

-- Rating European Covered Bonds
-- Rating European Covered Bonds Addendum: Market Value Spreads
-- Global Methodology for Rating Banks and Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Interest Rate Stresses for European Structured Finance Transactions
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Operational Risk Assessment for European Structured Finance Originators
-- Operational Risk Assessment for European Structured Finance Servicers
-- Rating Sovereign Governments

A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.